Iran-Pakistan Pipeline Deal Irks U.S.

The goal of the pipeline deal is to connect Iran with Asian markets, addressing substantial energy shortages in Pakistan. Pictured, a gas refinery in Qom, Iran, Jan. 5.

ISLAMABAD – In what has been widely perceived as a pre-election stunt, Pakistan has pushed ahead with a controversial pipeline deal with Iran – a move that has irritated the U.S. and that could lead to economic sanctions if Islamabad begins imports of Iranian gas.

Pakistan’s state-owned Inter-State Gas Systems and Tadbir Energy Costar Iranian Co. on Friday signed a contract to lay the gas pipeline in Pakistan. They announced work would start immediately and that the Pakistan portion of the pipeline would be completed in 15 months, though analysts believe that’s optimistic.

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The goal of the pipeline is to connect Iran with Asian markets, addressing substantial energy shortages in Pakistan. If the pipeline extends beyond Pakistan, the country stands to profit from substantial gas transit fees.

The U.S. has opposed the pipeline since its inception, promoting the Turkmenistan-Afghanistan-Pakistan-India pipeline as an alternative that keeps Iran firmly out of Asian energy markets.

Washington has made it clear that it will impose economic sanctions on Islamabad if it begins to buy gas from Iran. In a written reply to The Wall Street Journal, the U.S. embassy in Islamabad reiterated the U.S.’s position stating: “Our policy on Iran is well known. We have made it clear to all of our interlocutors around the world that it is in their interests to avoid activities that may be prohibited by UN sanctions or sanctionable under U.S. law.”

The agreement comes 10 years since talks about the gas pipeline first began, and may help address Pakistan’s power shortage, which leaves the whole country in darkness for up to six hours a day. These scheduled power cuts, or load shedding, are used to regulate the electricity distribution system that has been crippled by years of underinvestment.

Iran has already laid a pipeline to the Pakistan border, according to Iranian officials. Once connected at the border, the pipeline will link the port city of Asaluyeh, Iran, to Multan, in Pakistan, and will initially import 750 million cubic feet of natural gas per day. The pipeline will support approximately 4,000 megawatts of power generation per day, eroding Pakistan’s power deficit that currently stands at 5,000 MW per day, according to Pakistan government estimates.

A third arm of the pipeline was initially planned to run from Multan on to Delhi, India, but India withdraw from the project in 2008 after signing an agreement with the U.S.

While the pipeline could bring relief to energy-starved Pakistan, analysts say that the deal reveals more about the geopolitical dynamics between the U.S., Pakistan and Iran than about the government’s commitment to address the energy crisis.

“The deal will hurt ties between the U.S. and Pakistan,” said Fawad Khan, a senior energy analyst at KASB Securities, a Karachi-based brokerage, “But, the PPP-led government is advertising itself as moving ahead with the deal despite U.S. opposition hoping to win votes from anti-American parties.”

In August, the U.S. tightened existing sanctions against Iran for failing to comply with pressure to halt its nuclear program. The new law, which came into effect earlier this month, closes loopholes in existing sanctions on Tehran, and adds penalties for those seen as aiding Iran’s petroleum, petrochemical, insurance, shipping and financial sectors.

While the U.S. Treasury laid out in December how companies can exit the Iranian market before March 8 without violating the sanctions, Pakistan appears to be heading straight for the forbidden areas.

The threat of sanctions has in the past made Islamabad hesitate. In December, President Asif Ali Zardari cancelled a trip to Iran during which he was widely expected to sign the pipeline agreement.

Iran is providing a loan to Pakistan for a third for the cost of the pipeline, leaving Pakistan with a bill of $1 billion, according to The Nation, a local newspaper.

Pakistan’s finances are weak, with total public debt standing at 68% of gross domestic spending, leaving questions about Pakistan’s ability to foot its side of the bill. A spokesman for the Minister of Finance could not be reached for comment.

Shia-majority Iran wants to assert itself as politically relevant in the region to both counter the U.S. and the influence of Sunni-majority Saudi Arabia, says Abid Sulehri, head of the Islamabad-based Sustainable Development Policy Institute, a research group.

Unlike the worsening security situation and endemic corruption, the energy crisis affects every Pakistani on a daily basis, making it a crucial issue as elections approach.

Analysts say that the recent flurry of activity surrounding the pipeline is an attempt by the Pakistan People’s Party-led government to salvage its dire legacy on energy issues.

Mr. Sulehri described talks with Iran as “symbolic,” explaining that any suggestion that the project will actually move from talks to development is unrealistic. “It would be near impossible to divert the necessary funds to this project like the government is suggesting … as elections are approaching,” he said.

The PPP-led government is using the pipeline talks as a two-pronged way of gaining voter sympathy, said Mr. Khan. Firstly, the government wants to be seen to be making serious efforts to address the energy crisis, he said. Secondly, the government hopes that pushing ahead with the deal in the face of opposition from the U.S. will help counter the PPP’s image as pro-U.S.

Officials from the Ministry of Petroleum did not reply to requests for comment.

Anti-American sentiment is strong in the conservative sections of Pakistani society. It has been galvanized by sense that the PPP has been complicit in the U.S. drone attacks in Pakistan’s boarder regions. The U.S.-led operation that killed Osama bin Laden in May 2011 was also widely seen as an attack on Pakistani sovereignty allowed by the PPP government.

“It might win a few votes from anti-American religious parties,” said Mr. Khan, “But it is a short-sighted move that won’t distract most voters from the energy crisis.”

There are many more easily assessable solutions to the energy crisis in Pakistan, say energy experts. Addressing infrastructure-related inefficiencies would boost electricity supply by up to 15%, says Khaleeq Kiani, an energy reporter with Dawn, an English language newspaper in Pakistan. “Consumers would quickly feel an impact as they would be able to get rid of their costly generators and power back up systems,” he said.

Developing Pakistan’s own gas reserves would also be a much cheaper option than importing gas from Iran. Most of Pakistan’s gas reserves are in Baluchistan, and the security situation in the province has largely scared away investors.

The Iran-Pakistan pipeline would also pass through the volatile province of Baluchistan, which boarders Iran. Mr. Sulehri said that he had not seen any evidence that either Iran or Pakistan has addressed the security challenges that would face the construction and operation of the pipeline.

“This makes me think that the pipeline talks are just about dialogue,” he said.

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